Fascinating investigation of the many ways in which the United States has encouraged bad or looser lending for the vaunted “American Dream” of homeownership.
We’ve largely forgotten that Herbert Hoover, as secretary of commerce, initiated the first major Washington campaign to boost homeownership. His motivation was the 1920 census, which had revealed a small dip in ownership rates since 1910—from 45.9 percent to 45.6 percent of all households. The downturn was likely the result of a temporary diversion of resources away from housing during World War I. For Hoover, though, the apocalypse seemed nigh. “Nothing is worse than increased tenancy and landlordism,” he warned—though surely many things were worse. With little justification, he predicted that in just a few decades, three-quarters of all Americans would be renters. The press echoed the urgency. “The nation’s stability [is] being undermined,” the New York Times editorialized. “The masses [are] losing their struggle for a better life.”
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Congress passed a bill in 1975 requiring banks to provide the government with information on their lending activities in poor urban areas. Two years later, it passed the Community Reinvestment Act (CRA), which gave regulators the power to deny banks the right to expand if they didn’t lend sufficiently in those neighborhoods. In 1979, the Federal Deposit Insurance Corporation (FDIC) rocked the banking industry when it used the CRA to turn down an application by the Greater New York Savings Bank to open a branch on the Upper East Side of Manhattan. The government contended that the bank didn’t lend enough in Brooklyn, its home market.
Bankers recognized that a fundamental shift in regulation was taking place. Previously, the government had simply made sure that banks’ practices were safe and that depositors’ funds were protected. Now, it would use its power over banks to shape their lending strategies. Soon after the Greater New York ruling, for instance, the Federal Home Loan Bank Board told a Toledo, Ohio, bank that it had to eliminate its practice of lending only to its current customers during times when funds were tight; the maneuver might be discriminatory. The FHLBB also cast a dubious eye on other bank actions to tighten credit in a downturn, such as raising the minimum down payment on mortgages.
Seems like Look Communications has finally sold off their coveted wireless spectrum to Inukshuk. I previously wrote about that here.
Businessweek takes a look at the results of some of the MBA student-run investment funds.
This year the learning curve is steeper than most. Two days after the SMF class’s first purchases, the Dow Jones industrial average tumbled 800 points and finished the day below 10,000 for the first time since 2004. The class’s meticulous mathematical modeling and historical analysis suddenly meant nothing as the MBAs saw stocks they thought were safe bets—Johnson & Johnson (JNJ), Procter & Gamble (PG), Exxon Mobil (XOM), and IBM (IBM)—crash and burn.
It still fascinates me that speculating and investing, something that used to be a lot wilder and woolier — think in the days of the railroad barons and the pre-crash Twenties — has gotten so far from its roots in the halls of the university. All this math and statistical modelling and we’re still suffering the same fates, if not worse; at least in olden times workers stuck to their work and socked their money away. Often now, it’s at the mercy of those who take a much keener interest in money and markets.
David Olive weighs in on the Chrysler bankruptcy filing. I have to say, he makes complete sense to me — a Fiat-Chrysler tie-up doesn’t seem like it would suddenly resolve either company’s issues, and Chrysler’s been bouncing around different owners for years without any real success. They’re going to have to choose a really imaginative person or group of people to turn things around, if it’s really possible.
Interesting strategies for fast food businesses in these recessionary times. I can’t imagine, like Andrew Puzder (the CEO of CKE Restaurants quoted in the article), what kind of crap this food must be like, for them to be willing to use them as loss-leaders. I’ve never been much of a fast food eater, so this doesn’t really make me want to go out and try it; there was a big push by McDonald’s here where they were giving away their free, new, premium roast coffee and I had zero interest in trying it. Personally, I’m all for a fast food tax that gets used to subsidize healthier, less manufactured food; this race-to-the-bottom kind of business always sucks.
On a related note to the last post, in this New York Times Magazine interview with Obama on finance and the current economic issues, he says:
THE PRESIDENT: I want to emphasize, though, that part of the challenge is making sure that folks are getting in high school what they need as well. You know, I use my grandmother as an example for a lot of things, but I think this is telling. My grandmother never got a college degree. She went to high school. Unlike my grandfather, she didn’t benefit from the G.I. Bill, even though she worked on a bomber assembly line. She went to work as a secretary. But she was able to become a vice president at a bank partly because her high-school education was rigorous enough that she could communicate and analyze information in a way that, frankly, a bunch of college kids in many parts of the country can’t. She could write —
David Leonhardt: Today, you mean?
THE PRESIDENT: Today. She could write a better letter than many of my — I won’t say “many,” but a number of my former students at the University of Chicago Law School. So part of the function of a high-school degree or a community-college degree is credentialing, right? It allows employers in a quick way to sort through who’s got the skills and who doesn’t. But part of the problem that we’ve got right now is that what it means to have graduated from high school, what it means to have graduated from a two-year college or a four-year college is not always as clear as it was several years ago.
Never having been convinced with the utility of doing an MBA except for the “paper premium” one gets with any degree these days, I tend to enjoy threads like the one this astute comment appears in. It’s not really saying much new, but it’s kind of sad how universities and colleges, with their profit motives, are complicit in the rising credential requirements for the average job that might have once been staffed by a driven, intelligent high-schooler. The transformation of academics into a job mill is pretty gross, in my opinion.
There was news yesterday about eBay deciding to spin off Skype in an IPO that got me a few hits on an old entry, which seems kind of funny — perhaps I could have been a strategic advisor to eBay and saved them a whole heck of a lot of money and time wasted?
That said, I’ll easily admit when I was wrong too, unlike some big-name pundits.
A Forbes profile of Andy Beal, about an unconventional banker who virtually shut down his banking business during the years from 2004 to 2007 when dumb and dumber loans were being made, and who’s now taking the opportunity to buy up assets that he views as cheap. I don’t know why I didn’t see this article when it came out, but I thought it was worth a read.
In the last 15 years Beal says he has bought only one stock. If he ever thinks of investing in hedge funds or private equity, he says, “Just shoot me.” The blunt-spoken Beal shuns publicity and is uncomfortable in the public eye. He concedes he can seem “unprofessional.” After 20 years in the business he attended his first bankers’ conference last year.
Time Magazine profiles several “a little in, a lot out” (LILO) businesses. Nothing particularly new for those who spend a lot of time in the digital medium, but interesting enough in these thrifty times. Related: James Surowiecki talks about how companies that spent money in a recession to grow their business, like Kellogg’s and Chrysler (in the 1930s), managed to become much larger than those who did the conservative thing and conserved cash.
There’s definitely a common theme of ambition in hard times which I agree with — risk and reward are so strongly tied that it’s hard to imagine cost-cutting ever being as rewarding as opportunism in a recession — but neither article seems to spend much time profiling businesses that failed. It’s a typical blind spot that I’ve noticed even in books about traders, where a great deal of emphasis is put on why something goes right without seeing how, with slight tweaks, things can go wrong. Is Surowiecki’s claim really that testable, either? How can we be sure that Kellogg’s success was due in large part to their willingness to increase advertising in the Great Depression?
A blogger who portrayed himself as an economic expert is jailed by the South Korean government. Issues about freedom of speech notwithstanding, this again highlights how easy it is for people to look at someone who “predicts” some major event and turn that person into a trusted source, and how easily anyone on the internet can begin to write on economics or finance and, with the veneer of “expertism”, become a noted pundit. I find it particularly interesting that many financial pundits, including this Korean blogger, use pen-names online — why? I suspect there is a liability issue at play.
On a related note, “A Night With the Bears” was held recently at Toronto’s Elgin Theatre, a gathering where a bunch of people who purportedly saw the downturn coming got to pontificate on their views of the future, including Nouriel Roubini and Meredith Whitney, and sponsored by Eric Sprott’s company. Roubini and Whitney are both dining out on their newfound fame, with Whitney even starting her own consulting company. What seems to happen is that this image that people have of a person almost seems to calcify their own self-image, much like celebrities believe themselves somehow more important due to the randomness of their celebrity — a study on musical popularity put out in Science magazine in 2006 seemed to highlight this, showing how quality was often not tied to the success of an artist. In a similar way, unless an economic expert makes continued, successful predictions (much like a musician who avoids the one-hit wonder trap), these people are no more experts than anyone who happened to make a few statements that coincide with what occurred. If, in twenty years, we’re still talking about Roubini and Whitney’s excellent prognostication ability, then I’ll concede that they deserve the moniker of experts, but until then, in my view a large portion of their success was luck.
Now that business, finance and economic punditry is almost a dime a dozen these days, one of my old favourite columnists when I lived in Toronto, David Olive, has seemed kind of behind the curve in his topics — where once he seemed to bring interesting or novel takes about something, often bringing a clear eye to some company who had ridden the hype wave, but I haven’t read him as much lately. Here, though, he bring a fresh view of the potential Chrysler-Fiat partnership and why it’s even less than it’s cracked up to be.
Sacha Peter has been doing a little investing in fixed-income securities, more specifically trust preferreds (and a further entry on trusts versus bonds here). It’s an interesting area but for me, the liquidity is definitely an issue — Sacha does seem to prefer less generally well-understood areas which often tend to come with a lack of liquidity. I was reminded of these retail products when I read this article on small GM bondholders (unfortunately, I know some people who were put into them as recently as late last year, when some brokers perceived it as a fire sale on blue chip bonds). The article notes that some retail investors are doing short-term trading with securities that sound like these trust preferreds, which tend to have been issued by various investment banks, from what I’ve seen. I’m not sure if they are the same thing, but I suspect they are.
Other individual GM bond investors are playing the vulture game with the Wall Street pros, trying to benefit from temporary increases in bond prices. That is easier to do with GM because the company has “retail bonds,” which have a face value of only $25, and thus are more affordable and liquid than regular bonds, whose face value is $1,000. The GM retail bonds now trade for $2 to $4 each.
David Berger, 36, a Manhattan commercial real-estate broker, says he has made money over the past few months trading in and out of these securities. In March, he had a stake totaling $500,000. Because he has bought so low, they offer a 80% yield. “It’s nice to ride the wave,” he says.
Hmm, the “more liquid” part makes me wonder if these are the same type of securities. Sounds a little like this Berger guy is playing a nice game of chicken.
A new post up at Vancouver Condo Info that focuses on the Vancouver real estate market’s affordability. I tend to informally keep track of multiple townhouses and apartments that are for sale in my neighbourhood, and have noticed some of the properties that have been sitting for a good six to eight months have recently been stickered with “SOLD” signs. Obviously anecdotal, but it clearly jives with the uptick in buying from February that has been reported. Is it the very low mortgage rates? The “animal spirits” that everyone keeps talking about, driving some kind of populist optimism in real estate?
As someone who trades and invests, I don’t find it unusual for the price of a security or derivative to pop and drop in a fashion that is quite volatile; I can’t see how real estate would be that different, so one month is not indicative of an overall trend. Eventually, I would likely seek home ownership, but perhaps in an area or city that is truly affordable, or possibly when Vancouver goes from the “mid-range of historic affordability” as noted in the link above, to a real low. Of course, there’s a risk that the market never really hits the lulls we’ve seen in other markets but, well, that’s investing!
The New Scientist details how money messes with your mind.
Our relationship with money has many facets. Some people seem addicted to accumulating it, while others can’t help maxing out their credit cards and find it impossible to save for a rainy day. As we come to understand more about money’s effect on us, it is emerging that some people’s brains can react to it as they would to a drug, while to others it is like a friend. Some studies even suggest that the desire for money gets cross-wired with our appetite for food. And, of course, because having a pile of money means that you can buy more things, it is virtually synonymous with status – so much so that losing it can lead to depression and even suicide. In these cash-strapped times, perhaps an insight into the psychology of money can improve the way we deal with it.
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In a study to be published soon in the journal Psychological Science, Vohs and psychologists Xinyue Zhou of Sun Yat-Sen University in Guangzhou, China, and Roy Baumeister of Florida State University, Tallahassee, found that people who felt rejected by others, or were subjected to physical pain, were subsequently less likely to give a monetary gift in a game situation. The researchers then went on to show that just handling paper money could reduce the distress associated with social exclusion, and also diminish the physical pain caused by touching very hot water.
“Money seems to have symbolic power as a social resource,” says Vohs. “It enables people to manipulate the social system to give them what they want, regardless of whether they are liked.” Put bluntly, it looks as if money is acting as a surrogate friend. Could that explain why some people focus on extrinsic aspirations at the expense of real social relationships?
I saw a documentary recently on the CBC about the proliferation of VLTs (Video Lottery Terminals) around the country in bars and pubs and restaurants, and how several people had lied and stolen from friends and family, finally committing suicide due to the ruin brought on from gambling addiction to these machines. John Dunsworth, a Nova Scotia-based crusader against them (best known for playing Mr. Lahey on Trailer Park Boys), does a really good job in the doc of showing the mindset of an addicted player. I’m always fascinated when people get addicted to virtual things, which often times seem to boil down to a game that involves risk and intermittent reward — where does this tendency come from?
